Seeking greater transparency and corporate responsibility, the Companies Act, 2013 (New Companies

Act) has changed the role of auditors in companies.

Discussions about the role of auditors took center stage in the United States after a number of
corporate scandals the best documented of them being the Enron scandal, which sounded the death
knell for its auditor, Arthur Andersen. Reacting to this scandal, the United States passed the Sarbanes
Oxley Act, 2002 (Sarbanes Act).
Arthur Andersen (1885-1947) was one of the founders of the firm that came to be known as Arthur
Andersen & Co. in 1918.
Arthur Andersen (1885-1947) was one of the founders of the firm that came to be known as Arthur
Andersen & Co. in 1918.
This law established a separate body for the independent oversight of public company audits. This
ended more than hundred years of self-regulation of the public company audit profession. The Sarbanes
Act also prescribed that all audit committees (in listed companies) be independent of the management.
This independent audit committee, rather than the management, would be directly responsible for the
oversight of the external auditor. Additionally, audit firms were prohibited from providing certain nonaudit services to the companies they audit.
All these provisions ensuring that auditors are independent, free from all external influences, and
solely responsible for doing their job efficiently stem from the basic motive of increasing their
accountability. Since its notification, the Sarbanes Act has been both critiqued and applauded.
In India, the Satyam scandal brought to the fore the inadequacies in the regulatory scrutiny of
accounting. It is shocking that B. Ramalinga Raju could stand before the companys board and admit that
he had falsified accounts for several years to stave off a takeover, when a reputed accounting firm
such as Price Waterhouse India (PWC) had been auditing their accounts for several years. While PWC
claimed that they had received adequate evidence from Satyam and had carried out audits in
accordance with applicable Indian auditing standards, the scandal begged the question whether it could
have been averted if there had been stricter regulatory scrutiny of auditors. The following questions
were also asked: Should a company be forced to rotate its auditors? Should there be a greater liability
on auditors to deter such scandals? Let us now see whether the New Companies Act provides any
answers.
Auditors term
Advanced Commercial ContractsUnder the Companies Act, 1956 (1956 Act), an auditor was appointed
at the annual general meeting, for a term of one year. Under Section 139 of the New Companies Act, an
auditor will be appointed at the first annual general meeting and will hold office till the end of the sixth
annual general meeting, though its appointment will be ratified at every AGM.
Mandatory rotation

The New Companies Act (Section 139(2)) read with the draft rules provide for the mandatory rotation of
auditors. Individual auditors will be compulsorily rotated every five years and the audit firm will be
rotated every ten years in all companies except one-person companies and small companies. This step
was inserted to ensure that auditors do not increase their familiarity and reduce their independence by
continuing to audit a company for an unlimited period of time. One questions however, whether such
stringent requirements are needed in private companies.
A more basic question is whether the rotation of auditors really results in independence? The Standing
Committee on Finance reviewing the Companies Bill was sure that rotation does in fact lead to
independence. On the other hand, some feel that companies do not have much choice in relation to
auditors, and that such rotation may lead to cartelisation among large audit firms. Another argument is
that the rotation policy discourages small and medium-size audit firms from investing in technology and
training because of the uncertainty of securing another client of the same size operating in the same
industry, given that there are only a few large players operating in a particular industry. Arguments from
both the sides appear to have some strength.
Cooling period
A cooling period of five years is also prescribed (Proviso to Section 139(2)) before the reappointment of
auditors who complete one term. The same company cannot reappoint such auditors or audit firms for
the next five years after completion of one term.
Non-audit services
Similar to the Sarbanes Act, the New Companies Act in Section 144 lists a few services that a companys
auditor cannot provide, directly or indirectly, to the company and its holding and subsidiary companies.
The intent is to ensure that the auditor avoids any conflict of interest arising from the provision of other
services such as accounting and book keeping, internal audit, management, and actuarial and,
investment advisory services.
Tribunals power to remove auditors
While no separate regulatory body has been set up to regulate auditors, the National Company Law
Tribunal (Tribunal) has (in addition to the company itself) the power to order the removal of auditors.
The Tribunal under Section 140(5) can order a company to remove its auditor, if it believes the auditor
has acted in a fraudulent manner, or abetted or colluded in any fraud.
Reporting fraud
The New Companies Act also enhances the accountability of auditors. It does so by placing on auditors,
the onus of reporting fraud noticed by them, during the performance of their duties
Sections 138 to 148 of the Companies Act deal with accounts, audit and auditors. These provisions will
have far reaching implications for the audit profession. In this article some important provisions
contained in the companies act, 2013 are discussed.

Understanding the definition of auditor

An auditor is an independent professional person qualified to perform an audit. In accounting, an
auditor is someone who is responsible for evaluating the validity and reliability of a company or
organizations financial statements. The term is sometimes synonymous with comptroller.
Appointment of auditor
As per section 139, it is a prime requirement that every company shall at the first annual general
meeting appoint an auditor who can either be an individual or a firm. Appointment includes
reappointment.

The manner and procedure of selection of auditors by the members of the company will be such as may
be prescribed. It is a mandatory condition that before such appointment is made, the written consent of
the auditor to such appointment, and a certificate from him stating that the appointment, if made, shall
be in accordance with the conditions as may be prescribed, shall be obtained from the auditor.
Tenure
Company can appoint an individual as an auditor for more than one term of five consecutive years and
an audit firm as an auditor for more than two terms of five consecutive years.
Government Company
In a Government company, the Comptroller and Auditor-General of India shall, in respect of a financial
year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within
a period of one hundred and eighty days from the commencement of the financial year, who shall hold
office till the conclusion of the annual general meeting.
Eligibility, Qualifications and Disqualifications of auditors
A person will b qualified to be appointed as an auditor of a company only if he is a chartered accountant.
Where a firm is appointed as an auditor of a company, only the partners who are chartered accountants
shall be authorized to act and sign on behalf of the firm. A person will be disqualified if he is falling
under the following:
i.

an officer or employee of the company;

ii.
a person whose relative is a director or is in the employment of the companys a director or key
managerial personnel;
iii.
a person who has been convicted by a court of an offence involving fraud and a period of ten
years has not elapsed from the date of such conviction;

(Refer to section 141 for detailed list)

Removal and Change of Auditor

i.

Special resolution

The auditor appointed may be removed from his office before the expiry of his term only by a special
resolution of the company, after obtaining the previous approval of the Central Government in that
behalf in the prescribed manner.
ii.

Resignation

The auditor who has resigned from the company shall file within a period of thirty days from the date of
resignation, a statement in the prescribed form with the company and the Registrar, and in case of
Government company with the Comptroller and Auditor-General of India, indicating the reasons and
other facts as may be relevant with regard to his resignation. In case of non compliance he shall be
punishable with fine ranging between INR 50,000 to 5 lakh.
iii.

Tribunal

The Tribunal either suo motu or on an application made to it by the Central Government or by any
person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly,
acted in a fraudulent manner in relation to the company or its directors or officers, it may, by order,
direct the company to change its auditors.
In the case of such an application by the Central Government for change of Auditors, the Tribunal can,
within 15 days, pass an order that the auditor shall not function as such and the Central Government will
be able to appoint another auditor.
Consequences
The auditor who is removed by the Tribunal cannot be appointed as an auditor of that company for 5
years.
Punishment with imprisonment for a minimum term of six months which may extent to 10 years and
shall also be liable to pay a minimum fine of an amount involved in the fraud which may extend to 3
times the said amount.
If the fraud involves public interest the minimum period of imprisonment will be 3 years.

Powers and duties of auditors and auditing standards

Powers

Right to access :
Every auditor of a company shall have right to access at all time to book of accounts and vouchers of the
company. The Auditor shall be entitled to require from officers of the company such information and
explanation as he may consider necessary for performance of his duties.
There is an inclusive list of matter for which auditor shall seek information and explanation. This list
helps auditor to take special care on serious issues. The list includes issues related to:
(a) Proper security for Loan and advances,
(b) Transaction by book entries
(c) Sale of assets in securities in loss
(d) Loan and advances made shown as deposits,
(e) Personal expenses charged to revenue account
(f) Case received for share allotted for cash
The auditor of holding company also has same rights.
Auditor to sign audit reports :
The auditor of the company shall sign the auditors report or sign or certify any other document of the
company and financial transactions or matters, which have any adverse effect on the functioning of the
company mentioned in the auditors report shall be read before the company in general meeting and
shall be open to inspection by any member of the company.
Auditor in general meeting:
It is a prime requirement under section 146, that the company must send all notices and communication
to the auditor, relating to any general meeting, and he shall attend the meeting either through himself
or through his representative, who shall also be an auditor. Such auditor must be given reasonable
opportunity to speak at the meeting on any part of the business which concerns him as the auditor.
As per section 101, notice of general meeting must be given before 21 days either in writing or through
electronic mode to the auditor in such manner as may be prescribed. Every notice of a meeting shall
specify the place, date, day and the hour of the meeting and shall contain a statement of the business to
be transacted at such meeting.
Right to remuneration
The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as
may be determined therein. It must include the expenses, if any, incurred by the auditor in connection

with the audit of the company and any facility extended to him but does not include any remuneration
paid to him for any other service rendered by him at the request of the company.
Consent of auditor
As per section 26, the company must mention in their prospectus the name, address and consent of the
auditors of the company.
Duties
Make report
The auditor shall make a report to the members of the company on accounts examined by him on every
financial statements.
The auditor report shall also state:
(a) Whether he has sought and obtained all the necessary information and explanations,
(b) Whether proper books of account have been kept,
(c) Whether companys balance sheet and profit and loss account are in agreement with books of
accounts and returns,
(Refer to section 143 for detailed list)
Audit report of Government Company :
The auditor of the government company will be appointed by the Comptroller and Auditor-General of
India and such auditor shall act according to the directions given by them. He must submit a report to
them which should include the action taken by him and impact on accounts and financial statement of
the company.
The Comptroller and Audit General of India shall within sixty days of receipt of the report have right to
(a) conduct a supplementary audit and (b) comment upon or supplement such audit report.
The Comptroller and Audit General of India may cause test audit to be conducted of the accounts of
such company.
Liable to pay damages
As per section 245, the depository and members of the company have right to file an application before
the tribunal if they are of the opinion that the management or conduct of the affairs of the company are
being conducted in a manner prejudicial to the interests of the company

They also have right to claim damages or compensation from the auditor including audit firm of the
company for any improper or misleading statement of particulars made in his audit report or for any
fraudulent, unlawful or wrongful act or conduct.
Branch Audit :
Where a company has a branch office, the accounts of that office shall be audited either by the auditor
appointed for the company, or by any other person qualified for appointment as an auditor of the
company. The branch auditor shall prepare a report on the accounts of the branch examined by him and
send it to the auditor of the company who shall deal with it in his report in such manner as he considers
necessary.
Auditing Standards :
Every auditor shall comply with the auditing standards. The Central Government shall notify these
standards in consultation with National Financial reporting Authority. The government may also notify
that auditors report shall include a statement on such matters as notified.
Fraud Reporting :
If an auditor of a company, in the course of the performance of his duties as auditor, has reason to
believe that an offence involving fraud is being or has been committed against the company by officers
or employees of the company, he shall immediately report the matter to the Central Government within
such time and in such manner as may be prescribed.
Winding up
As per section 305, at the time of voluntary winding up of a company it is a mandatory requirement that
auditor should attach the copy of the audits of the company prepared by him.